Integrated Reporting for Economic Recovery

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1 Integrated Reporting for Economic Recovery Overview: What is integrated reporting? Integrated Reporting <IR> consolidates information about an organisation s strategy, governance, performance and prospects in order to communicate the commercial, social and environmental context within which it operates. It provides a comprehensive overview of an organisation s management practices within the context of its external environment, while examining how the entity generates and sustains value in the short, medium and long term. International Integrated reporting framework and building blocks The <IR> framework was developed by the International Integrated Reporting Council (IIRC) in order to redefine corporate reporting to include the full range of factors affecting value creation in organisations, as well as support integrated or holistic thinking and decision-making. The <IR> framework provides guidance to organisations on preparing an integrated report by specifying the core concepts, guiding principles and content elements. These components of an integrated report enable governments, investors and other stakeholders to hold for and non-profit organisations accountable in their dealings and activities. 1. Core concept Value Creation Capital Process Under the <IR> framework, organisations acknowledge that their ability to create and sustain value is not determined by internal factors alone but also by external factors, relationships and a combination of capital inputs. The combination of these factors and continuous implementation make up the business model of the organisation. The organisation leverages capital, which includes resources and relationships. The <IR> framework identifies six distinct types of capital - financial, manufactured, intellectual, human, social, and natural. However, it is not essential that organisations capture all types in their integrated report; rather, focus is placed on the types of capital that are relevant to the entity. The organisation s business model determines how value is created. The interaction of the organisations activities and various capital inputs creates outputs (products and waste) and outcomes (consequences internally and for society at large).

2 2. Guiding Principles Strategic Focus Overview of the organisation s strategy, and how it promulgates established values over time Future Orientation The organisation s future expectations, prospects and uncertainties Materiality Disclosing information that is material to organisation s ability to create and sustain value in the short long term Conciseness Comprehensive and sufficient information to understand ESG context of the organization, while being succinct <IR> Connectivity of Information Interconnectedness of the business model with external factors and capital, that influence performance Stakeholder Relationships Overview of stakeholder relationships and responsiveness of the organisation to stakeholders needs Reliability and Completeness Accurate and balanced information on relevant issues, whether positive or negative Consistency and Comparability Consistent reporting and comparing value creation strategy with similar organisations 3. Content Elements 1. Organisational overview and external environment 5. Strategy and resource allocation 2. Governance 6. Performance 3. Business model 4. Risks and opportunities 7. Outlook 8. Basis of <IR> preparation & presentation Isolated vs. Integrated reporting There is growing consensus that the traditional reporting model does not sufficiently meet the information requirements for investors and other stakeholders. Integrated reporting requires a well-rounded, holistic approach. Some of the significant differences between traditional and integrated reports is highlighted in the table below. Current model Integrated reporting Focus Past, Financial Future, connected and strategic Timeframe Short term Short, medium and long term

3 Detail Long and complex Concise and material Compliance Rule bound Responsive to circumstances Presentation Paper-based Technology based Trust Narrow disclosure Greater transparency Thinking Silos/isolated Integrated /holistic Stewardship Financial capital All capital (human, financial, natural, social, intellectual, and manufactured) Technology Paper based Technology enabled Source: International Integrated Reporting Council <IR> for Nigeria s Economic Recovery The Business Case for IR Nigeria s slow recovery from the recession stresses the need for increased investment. Although foreign portfolio investment peaked in 2017 to $7.3 billion 1 (highest since 2014), foreign direct investment remains persistently low at $981 million 2 due to investor skepticism and growing uncertainties about the upcoming elections. Hence, organisations must adopt new ways of holistic thinking to stand out to foreign investors and attract long-term investment. As global attitudes shift towards higher environment and social consciousness, investors and consumers are increasingly prioritising organisations that uphold environmental and social governance (ESG) values and incorporate sustainability in their business model and strategy. Integrated thinking is achieved when an organisation shows how its governance connects with rewards and risk, and when strategic priorities are dynamic and aligned with capital resources, relationships and key performance indicators. The <IR> framework requires that information on ESG issues be presented together with financial factors in order to depict a complete and balanced view of the overall state of the organisation. There is strong evidence linking reporting of non-financial factors (ESG) to improved financial performance. The London Stock Exchange Group found that FTSE companies that adopted the <IR> framework have successfully attracted more ESG investments relative to their non-ir peers 3. Similarly, a study at Stanford Business School found a positive relationship between integrated report quality and liquidity as well as expected future cash flows. 4 Leading global CEOs are looking beyond quantitative metrics (earnings and stock price) and are actively exploring new ways to measure the long-term health of their companies and communities by asking questions that are materially relevant to their ESG contributions 5. It has become evident that changing investor and consumer preferences place more pressure on companies to incorporate environmental and social responsibility factors in their long-term corporate strategy. On the other hand, leading companies globally are acknowledging that sustainable business models are those that incorporate ESG best practices, impact and dynamism into their business models. The traditional approach to corporate reporting is becoming obsolete, as the world s most successful firms update their reporting models to reflect their long-term value creation strategies. Currently, large Nigerian companies publish separate corporate social responsibility (CSR) or sustainability reports (SR) that communicate information on social initiatives, emissions and waste management, water conservation, energy reduction and similar topics. However, majority of these reports fail to connect ESG values to corporate 1 NBS Capital Importation Ibid. 3 London Stock Exchange Group, Your Guide to ESG Reporting 4 The Economic Consequences Associated with Integrated Report Quality: Capital Market and Real Effects 5 PwC 21 st Annual CEO Survey

4 strategy or financial performance. The initial transition from CSR to SR focused on shifting from a philanthropic approach to itemizing the organisation s impact on natural and human capital. Moving to <IR> expands the report to include all materially relevant capital, connecting them to business risks, decisions and outcomes in the short to long term. Under the current economic climate, Nigerian firms can reap tangible benefits from <IR> in the multiple ways: 1. Cost reduction organisations can reduce compliance and procurement costs. Eco-friendly organisations can also save costs through eco-efficiency. 2. Revenue growth innovative business models, product innovation and new revenue streams achieved through integrated thinking can lead to aggregate revenue growth. 3. Risk management Incorporated ESG values can allow organisations to better manage reputational, operational and regulatory risk. The aggregate benefits accrued in <IR> compliant organisations have the potential to boost Nigeria s economic recovery. A holistic approach to strategy and reporting can lead to higher confidence and satisfaction in investors and stakeholders. In addition, investors gain a more comprehensive understanding of an organisation s financial and nonfinancial position, strategic priorities and risks, and are able to make more informed investment decisions. Fund managers in particular are better able to meet their fiduciary duties to clients, while civil society stakeholders become conscious of the organisation s role in making their environment more sustainable. The direct outcomes include better access to capital for organisations, more efficient resource allocation and improved synergies across various sectors in the economy. <IR> for National Development From the perspective of policymakers and regulators, <IR> enables for more effective resource allocation, particularly in capital-intensive sectors with large social and environmental externalities. Adequate reporting of the sustainability activities within organisations can prevent duplicity of efforts and ensure harmonization in sectors that fall under the development priorities of the government. Furthermore, with <IR>, policymakers can ensure that internal decisionmaking processes, priorities and incentives are linked with ESG values that ensure economic and market stability. <IR> will also be instrumental in tracking Nigeria s progress in achieving the Sustainable Development Goals (SDGs). The SDGs are a collection of 17 objectives championed by the United Nations that seek to improve living standards of people across the globe by balancing economic growth, social development and environmental protection. Nigeria s SDG performance remains poor, ranking 152 out of 188 countries. The high poverty rate of 62.6%, largely driven by non-inclusive growth in the early 2000s 6, combined with high inequality (gini coefficient = 43) 7 and unemployment (14%) 8 continue to place downward pressure on the country s human development score (0.527) 9. Nigeria needs to lift 83 million people out of poverty by 2030 in order to satisfy the SDGs. This commitment is reflected in the National Priorities and Strategic Objectives put forth in the national Economic Recovery and Growth Plan (ERGP). The SDGs hold significant implications for participating countries. A 2017 report by the Business and Sustainable Development Commission identified a $12 trillion global market for achieving just 4 of the 17 SDGs food & agriculture, sustainable cities, energy and health and wellbeing that could lead to the creation of an estimated 380 million jobs 10. These findings hold immense opportunities for Nigeria in not only generating but also sustaining growth in the long run. If implemented properly, the national priorities restoring growth, investing in people and building a globally competitive economy will bring the nation closer to localising the global benefits of the Sustainable Development Goals. In implementing our national priorities, a robust reporting and data collection framework is essential at the federal, state and local government levels. Keeping track of key performance indicators, and integrated reporting in the private and social sectors has the potential to contribute greatly to these efforts. There is a global consensus that poverty 6 NBS 7 UNDP 8 NBS 9 UNDP 10 Business and Sustainable Development Commission

5 reduction will largely be driven by the private sector, given the fiscal and institutional constraints of government. Achieving the SDGs will be the driving force for global economic growth, and long-term investors are starting to recognise this as the most sustainable source of financial return. Fortunately, many companies already report on aspects of the SDGs. However, existing instruments that monitor, align and measure performances to the SDG indicators are imperfect. The charge going forward is to report on goals and targets in a consistent and systematic way that provides insight into whether or not organisations are making meaningful progress on sustainable development. Governments are already using the SDGs to inform development of policy and regulation. Those businesses that incorporate the SDGs are more likely to be aligned with emerging policy, giving them more resilient business models. Businesses that align their strategy with national priorities will most likely be given licence to operate in new markets. They are also more likely to receive more support from governments and citizens alike. However, those that do not, or those that struggle to demonstrate alignment with the national interest, cannot expect equivalent treatment, leaving them at a disadvantage.

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7 PwC s Roadmap for Integrated Reporting Making the leap from traditional annual financial reports to a fully integrated report is challenging. While a number of frameworks have been developed, there is little practical guidance to help management teams implement integrated reporting in a way tailored to their organisation. PwC s Integrated Reporting framework details activities required to develop a robust integrated report We prioritise stakeholder concerns in shaping our approach and the content of the report. It is impossible to implement a framework without internal technical expertise. 1. Materiality analysis: Understanding material issues for your business, based on investor and other stakeholders input 2. Value creation: Understanding how your particular organisation creates value for all its major stakeholders 3. Impact evaluation: Monitoring the indicators that capture the impact of your strategy and operations, and using them to report your value creation story to investors and other stakeholders. Online E&S Toolkit The Sustainable Finance Toolkit is an industry-leading web-based application to support the customised integration of Environmental and Social (E&S) risk management into existing processes and systems. It can be a central tool that holds sector guides, client and sector checklists, explanations of E&S risks and guidance on next steps for risk management all in line with your policy and procedures. The toolkit assists deal teams through the transaction process: screening, assessment, credit approval, monitoring and reporting. The Toolkit has been developed through a continuous cycle of operational use, feedback and improvement and is kept up-to-date on the latest standards.

8 Overview of Key Features: Flexibility to align our tools and systems to your internal policies and processes Tools to assess environmental and social risks and to provide recommended solutions Incorporates international best practice e.g. IFC Performance Standards Store, track and monitor transaction assessments and retrieve them as desired Nigeria SB Principles and Equator Principles reporting and portfolio dashboards Library of decision-support tools and resources Contact Andrew S. Nevin, PhD Advisory Partner and Chief Economist Tel: Ext About PwC At PwC, our purpose is to build trust in society and solve important problems. We re a network of firms in 158 countries with more than 236,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more by visiting us at PricewaterhouseCoopers Limited. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers Limited (a Nigerian limited liability company), which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.